Business Associations
Prof. Garten
Table of Contents
INTRODUCTION TO THE CORPORATION
What is a corporation? It is a framework through which people conduct modern business. It is a legal entity that can enter into contracts, own property, and be a party in court. It comes in assorted sizes, form a publicly held multinational conglomerate to a one person business. Ultimately, it is an investment vehicle for the pooling of money and labor à a grand capitalist tool.
Money Capital: à comes from shareholders and creditors
Human Capital: à comes from executives and employees
Corporate law deals with the relationship between managers and shareholders and between managers and employees. Who do the managers serve?
Corporation law is mostly STATE law. Even though a federal regulation exists that law only applies to public companies (those companies whose stock can be purchased by individuals). Therefore, states are free to regulate corporations in any way they see fit.
Delaware dominates corporate law b/c it adopted laws that were corporate friendly. If you charter in DE, you merely pay some fees and agree to svc of process there.
CA law is an exception; it often takes a road less traveled in corporate law.
The MODEL CORPORATION ACT is sometimes persuasive to judges, but for the most part, we make the assumption that DE law controls.
· Chartering: file some paper and pay chartering fees and consent to service of process
Why Do We Need Corporate Law? Do We Need It at All?
The argument against: A corporation has shareholders, employees, and other stakeholders. The common goal of this group is to make money, and as long as they don’t harm anyone, they should be permitted to govern themselves and be left alone to work out their problems through contract.
Radol v. Thomas -(handout of Complaint)—Marathon Oil and U.S. Steel merger case
The plaintiffs are minority shareholders of Marathon Oil who are owners of common stock. They are acting on behalf of themselves and the class.
The defendants are U.S. Steel, who owns the majority of the stock in Marathon Oil (about 80%), and the managers of Marathon Oil.
Facts: U.S. Steel took over Marathon by making direct offers to all stockholders through a tender offer. U.S. Steel simply wrote letters and placed ads, offering to buy the stock from corporate officers and all other shareholders. The offered purchase price was $125, a price above the market price.
· Tender offer is a public offer made to shareholders, which tends to be some premium over the market price. This is different from a merger and is federally regulated.
· Merger: one of the two companies disappears and the shareholders do not have a choice.
To make this acquisition, U.S. Steel had to case its net wide enough. It needed to purchase 51% of the stock to gain voting control and other powers.
We’ll identify stakeholders and points of conflict and consider whether they should be left alone or whether they need the assistance of corporate law to settle disputes.
· To decide whether the tender offer is a good price, you check how much the stocks sell for on the exchange. You have to assume that this offer was better than the exchange price b/c so many Marathon stockholders accepted this offer. However, plaintiffs are the minority stockholders who did not accept the deal.
What if every shareholder of Marathon Oil Company wanted to sell but U.S. Steel Company said it only wanted 51%. Is this fair?
To minimize transaction costs, a company like U.S. Steel might purchase large blocks of shares held by “insiders” and other “big players,” such as pension funds and banks.
Marathon is supposed to be acting in the best interest of all its shareholders, whereas U.S. Steel is interested in saving as much money as possible. There is concern that the small shareholders will lose desire of investing if they alwa
ir shares on the open market, thereby, rejecting the tender offer and merger notes (also called a market out). Moreover, there was fair disclosure by U.S. Steel; they wanted the majority and said they were going to merge. The minority shareholder knew what U.S. Steel was going to do and they had that information when they decided not to tender.
However, the minority shareholders couldn’t sell on the open market b/c the market price dropped when the offer was announced. One reason why this happened is that the market viewed this as a done deal—para. 26, U.S. Steel had built in a poison well option, that if the deal fell through, U.S. Steel would have the option to purchase 10 million shares and the Yates Oil Field. This second part would discourage Mobil from trying to acquire Marathon b/c an important asset would be lost to U.S. Steel.
The managers of Marathon agreed to these poison well options. They may have been influenced by U.S. Steel giving them higher prices for Marathon managers’ stock options under a separate deal and by securing Marathon mangers jobs. MOTIVATED by PERSONAL INTERESTS, which presents a conflict of interest.
Despite all the problems and the fact that Mobil’s offer was arguably just as good, U.S. Steel does get the deal and it acquires Marathon. Given the situation, risk adverse shareholders will probably tender their shares to U.S. Steel rather than risk losing their investment.
The shareholders dilemma: you go to the market to try and sell Marathon stocks. Once U.S. Steel announces the deal, no one in the marketplace is going to pay anything over $125 for the stocks.
Front-loaded Tender Offer: offer cash up front with the threat of getting much less if you don’t tender.
